Don't count on gas costs staying low

RIO VISTA, CA - NOVEMBER 19: Gas prices below $2 per gallon are displayed at an Arco service station November 19, 2008 in Rio Vista, California. Gas prices have fallen to below $2 a gallon for the first time since March of 2005 with the national average of $1.99 for a gallon of regular unleaded. (Photo by Justin Sullivan/Getty Images) less

RIO VISTA, CA - NOVEMBER 19: Gas prices below $2 per gallon are displayed at an Arco service station November 19, 2008 in Rio Vista, California. Gas prices have fallen to below $2 a gallon for the first time ... more

Photo: Justin Sullivan, Getty Images

Photo: Justin Sullivan, Getty Images

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RIO VISTA, CA - NOVEMBER 19: Gas prices below $2 per gallon are displayed at an Arco service station November 19, 2008 in Rio Vista, California. Gas prices have fallen to below $2 a gallon for the first time since March of 2005 with the national average of $1.99 for a gallon of regular unleaded. (Photo by Justin Sullivan/Getty Images) less

RIO VISTA, CA - NOVEMBER 19: Gas prices below $2 per gallon are displayed at an Arco service station November 19, 2008 in Rio Vista, California. Gas prices have fallen to below $2 a gallon for the first time ... more

Photo: Justin Sullivan, Getty Images

Don't count on gas costs staying low

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Could the era of cheap fuel be back?

Oil costs one-third what it did this summer. Gasoline prices now average less than $2 per gallon, their lowest level in more than three years. Although California is a bit more expensive - about $2.20 per gallon - prices here are falling every day.

So is this a return to the golden age of inexpensive, plentiful fuel? Probably not, many experts warn.

For one thing, oil still costs roughly twice its historic average. At $49 per barrel, it only looks cheap in comparison to this past summer, when it reached $145.29 on the New York Mercantile Exchange. In addition, the oil bubble did not pop because new supplies of crude suddenly flooded the market. Worldwide oil production has been flat for years. Instead, the bubble popped because the global economy started spiraling into recession, and recessions lower the amount of oil that countries consume. Speculative investors who had driven oil to record heights this summer had been willing to ignore gloomy economic data so long as it seemed confined to the United States. Once it became clear the rest of the world also was sliding, they started selling en masse. Whenever the recession ends, demand for crude will start rising again. So will its price.

Delicate balance

And because the current lower prices give oil-producing countries less money to invest in developing their oil fields, the delicate balance between supply and demand could quickly tighten again, she said. In an effort to shore up prices, the Organization of the Petroleum Exporting Countries is scaling back production, not expanding it.

"We weren't keeping pace as it was," Jaffe said. "We're still going to come out at the other end of the (recession) with more people in China and India having a car. So then you have to ask the question, in five years, where's that oil going to come from?"

That means the American consumer is probably facing a brief price break, one that could last months or even a year or two but won't herald the start of a new era. Still, most people will welcome the break.

This decade's rising prices for oil and gasoline have insinuated themselves into all aspects of the economy, costing consumers and businesses in many ways. Plane ticket prices jumped as airlines struggled to pay for jet fuel. Food prices rose worldwide, triggering riots in some countries. Any company that transports its products by cargo ship, truck or train had to find ways to cover the rising cost of fuel, usually by passing it on to customers.

$240 billion tax cut

Now prices for many consumer goods are falling, and the lower cost of fuel is one reason why. Airline ticket prices, for example, slid 4.8 percent in the last month, according to the U.S. Bureau of Labor Statistics. Grocery prices haven't dropped yet - they actually rose 0.3 percent last month, according to the bureau - but they too could fall.

"It's pretty significant in terms of the money it puts back in the pockets of consumers," said Nariman Behravesh, chief economist for the IHS Global Insight consulting firm.

How significant? The national average for regular gasoline has now dropped more than $2 per gallon since this summer, when it reached $4.11 per gallon. And that $2 drop in gasoline prices since this summer roughly equals a $240 billion tax cut for consumers, Behravesh said.

Then again, plunging home values and stock portfolios have cost Americans about $7 trillion, he said. As a result, saving a little at the gas pump and the grocery store will help households, but it won't send shoppers flocking to the malls.

"It certainly might loosen the purse strings a little bit," Behravesh said. "But I think it's going to be on smaller items. They may be more willing to go to a low-end restaurant, but they're not going to take more trips or spend a lot on Christmas presents."

The big question

So how far could oil and gasoline prices fall?

Again, that depends on the broader economy. The speculators and large institutional investors who dominate the oil market are still searching for clues as to when the economic meltdown will stop. Until then, they will probably keep selling oil. Indeed, speculators in the oil markets are now betting that prices will fall further.

Until recently, MacIntyre's administration projected that oil prices would bounce back above $100 in the new year, averaging $112 per barrel in 2009. Then last week, the administration cut that forecast nearly in half, saying oil would average $63.50 next year. That's the statisticians' way of saying the recession will be longer and more severe than expected.

"The change in economic growth for next year is drastically different from what we thought just a month ago," MacIntyre said.

Oil analysts still think prices will rebound once the economy stabilizes. They just don't know when that will happen.

"If you're looking at low oil prices in the context of $150 per barrel, yes, we'll have low oil prices," said David Kirsch, director of market intelligence for the PFC Energy consulting firm. "But is it going to stay around $50? It's hard to see that happening."